Financial Markets and Terrorism: The Perspective of the Two Sides of the Conflict

Abstract

This paper uses a unique data set and advanced econometric methods to examine the effect of terrorism on financial markets of both sides of the barricade in the Israeli-Palestinian conflict. The main finding are: (1) Real economies on both sides suffered significantly during the intifada period; (2) On the avarege share prices on the Israeli side declined significantly due to terror attack by 0.43% where the decline on the other side (probably due to fear of retaliation) was much less and insignificant; (3) There is a bi-directional causality effects of returns in the two markets and both markets are affected by the US market; (4) The more fatal the terror attack is, the greater is the negative effect in the two markets. In the more severe terror attack event (i.e. more people were killed and injured or if it was suicide attack), share prices in the Israeli market declined significantly by 0.63% compared to a decline of 0.16% in less severe attacks. The same pattern, but less significant is revealed on the Palestinian side. In the more severe terror attack, share prices declined significantly by 0.21% compared with 0.07% in less severe attacks.